Trends in US commercial real estate mortgage purchasing and re-financing
After reviewing pre-existing information provided by credible news media sources (Forbes, The Street) and real estate trade publications and blogs (National Association of Realtors), our research team was successful in identifying several key trends for the US commercial real estate market for the year 2018.
Overall, the outlook for domestic commercial real estate purchases and also for refinancing activities in the year 2018 is quite positive. The key drivers contributing to this favorable outlook include a strong US economy, historic low interest rates, a recent overhaul in the US tax codes favoring business, the movement among many Fortune 500 companies back to city center properties, growth of new offices in suburban communities, and an increased demand for warehouse and distribution center properties especially in those locations hurt by the loss of large manufacturers.
Please note that upon a thorough review of the available sources, our team was unable to point to any one specific source that directly answers your question about trends in the year 2018 for the commercial real estate market, especially from the perspectives of purchasing or refinancing. So instead we used a combination of the best on-topic sources we could find that offer expert opinions in order to highlight key trends for you and reach a conclusion. We present a more detailed description of our findings below.
INTEREST RATES AND INFLATION
US interest rates play a key role in the status of the domestic commercial real estate market at any point in time. The prime interest rate which is determined by the US Federal Reserve Bank has remained at historic lows since 2008. According to a recent article in Forbes magazine, the US Federal Reserve Bank's forecast for interest rates in the year 2018 suggest no change to its current prime rates which range between 1.25% to 1.5%. If this forecast is correct, the cost of borrowing money for commercial real estate deals will stay low and affordable, which is a boon to investors. One unknown as noted by the article's author is the chance of inflation accelerating which would likely cause a rise in interest rates. Another unknown is the influence of incoming new Fed Chairman Jerome Powell.
If there is an uptick in inflation this year, commercial real estate lenders may respond by tightening their borrowing standards. As a result, there could potentially be a drop in borrower activities for commercial real estate deals. This is a variable commercial real estate investors should continue to watch, but as of this writing experts say the inflation rate in the US remains "sluggish."
The recent overhaul to the US tax codes has resulted in creating a more business-friendly tax climate. This may encourage the growth of new business enterprises and the expansion of existing businesses in the coming years. In both cases, the need for more workspace for these US-based businesses will likely increase.
LOCATIONS AND TYPES OF PROPERTIES FAVORED
In the opinion of Ryan Severino, the Chief Economist for JLL, a Chicago-based Fortune 500 investment management firm, in the near term, city centers will see a return of Fortune 500 companies requiring workspaces (in new or existing buildings) in downtown locations, while suburbs continue to be the preferred location for new office building properties that lease to a wider variety of tenants.
Mr. Severino predicts the outlook for domestic commercial real estate remains "sunny" overall. That said, he does opine that the demand for certain types of commercial real estate properties (retail spaces, multifamily buildings, certain sectors in industrial) may have peaked in 2017 and may start declining somewhat from that peak in 2018 with a further decline to happen in 2019.
Two types of property within the industrial property category that are doing very well currently and remain attractive to both lenders and investors and are warehouses and distribution centers. According to analysts at JLL, the demand for more warehouses and more distribution centers can be directly tied to the growth in e-commerce businesses. Online purchases by US consumers last year was responsible for 9% of all domestic sales. That figure is expected to rise to nearly 14% of all domestic sales in the coming years as consumers make more online purchases more frequently. Consumers also expect fast delivery of those purchased items. The combination of currently low vacancy rates with rising demand for storage and distribution spaces moves warehouse and distribution property types to the top of the list for investors considering the purchase of properties or the refinance of properties in 2018. Investors should also keep location in mind; analysts suggest that building such warehouses and distribution centers in certain US cities and states that have been harmed in recent years by the downsizing or closing of manufacturing facilities would be a boon to the local economy of those communities and therefore such buildings would likely be welcomed by local city leaders.
Experts in the US commercial real estate market seem to agree the outlook in 2018 remains very positive. They point to historic low interest rates and the recent tax cuts favoring US businesses to be underlying factors supporting the strong domestic commercial real estate market. The influence of the incoming Chairman of the Federal Reserve Bank, changes upward of the prime lending interest rates in the near future, and the possible rise in inflation remains uncertain, but it is suggested that higher interest rates and/or higher inflation, leading to a tightening of borrowing standards by lenders, would likely slow down the domestic commercial real estate market.
While certain types of properties are in decline (retail malls especially), the demand for other types of properties (warehouses and distribution centers in particular) remains strong and is predicted to grow in the near term. Location is also a key consideration; US city centers are seeing a return of Fortune 500 companies who need workspaces there, suburbs of those cities continue to see new office building construction, and cities hurt economically by the loss of manufacturing businesses are welcoming to investors who might build new properties or repurpose existing properties to become warehouses and distribution centers especially to meet the needs of growing e-commerce enterprises.